PetroChina's Oil Sands Deal Sharpens Edge in Heavy Oil

PetroChina's $1.7 billion oil sands deal in Canada will sharpen its edge as a producer of heavy oil, and again underscores how access to credit is enabling Chinese companies to acquire overseas reserves.

PetroChina was chosen by closely held Athabasca Oil Sands Corp. as its joint venture partner after the Canadian firm realized it would be difficult to finance its MacKay River and Dover oil sands projects in Alberta province via equity markets.

It also impressed AOSC with its expertise in producing heavy oil -- generally defined as having an American Petroleum Institute gravity of less than 22 degrees -- in northeastern China.

Prices of light, sweet crude on the New York Mercantile Exchange are currently trading at half their peak hit in July last year. This has led some producers, including Royal Dutch Shell PLC (RDSA), to postpone oil sands projects as they are capital-intensive and need crude futures above a certain threshold to be viable.

U.S. oil demand is also in the doldrums due to the global economic downturn, making it harder for producers to justify investments in new crude oil production.

Complicating matters is draft U.S. legislation to curb greenhouse gases that might penalize refiners for relying on emissions-intensive oil sands output, further crimping U.S. demand.

While these suggest PetroChina's investment in Canadian oil sands is opportunistic, analysts say it offers China's largest-listed oil company several advantages. A PetroChina spokesman declined to comment.

PetroChina and parent China National Petroleum Corp. are building a position overseas in heavy oil output. CNPC is active in Venezuela's Orinoco heavy oil belt and is mulling bids with France's Total SA (TOT) for two more oil blocks there, people familiar with the situation said in July.

On Monday, AOSC said a regulatory application for the first phase of the MacKay River project, representing an output of 35,000 barrels per day, is planned at the end of 2009.

"We believe PetroChina's domestic heavy oil extraction experience in (the) Liaohe field could help in monetizing these trapped resources in these Alberta sands," said Gordon Kwan, head of energy research at Mirae Asset Securities.

As well as direct financing, PetroChina can provide locally sourced equipment and drive down labor costs by transferring its own engineers.

Heavy oil is attractive to Chinese companies because it has lower commercial value than lighter grades. This means it can be purchased and run through refineries more cheaply when oil prices are high.

PetroChina may be betting on two long-dormant pipeline projects between Alberta and the Pacific Coast moving ahead so that equity oil can be shipped to its Chinese refineries.

Enbridge Inc.'s (ENB) Northern Gateway Pipelines proposes to link oil sands to a deepwater port in Kitimat, British Columbia. Kinder Morgan Canada, a unit of Kinder Morgan Energy Partners LP (KMP), has a similar proposal, and says it can also expand its existing pipeline running west from Alberta.

Any of these projects could increase the share of oil sands production destined for Asia to about 15% by the middle of the next decade, compared with 1% today.